Vol 12 (2015) - Issue 4

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French Supreme Court Rules out Liability for Undercapitalising Companies

Minimum share capital requirements have disappeared from French legislation over the last few years, leaving the société anonyme as the last and only commercial company with such a requirement, set by the French Commercial code at EUR 37 000, thereby increasing the need in practice to accurately determine the equity and debt financing required when starting operations.
In this regard, two decisions addressing the liability of the main shareholder and the Managing Directors (the 'MDs') of commercial companies in the case of undercapitalisation, were recently rendered by the Commercial chamber of the French Supreme Court (hereafter the 'Supreme Court'). In both matters, although based on different facts, the liability of shareholder and MDs, respectively, was not triggered.
In the first case, the unusual attempt by a subsidiary, not subject to any insolvency proceedings, to target the deep pockets of its parent company was dismissed by the Paris Court of Appeal.
In the second case, the court appointed liquidator of the company, which had filed for insolvency, obtained a ruling by the Bordeaux Court of Appeal sentencing the two MDs, who were also shareholders of the company, to assume personal responsibility for a part of the company’s outstanding debts. The decision by the Court of Appeal was overruled in a short decision, setting a ground-breaking precedent.

I. SA Rhodia v SA Sanofi: the end of the saga
a. Facts
In 1997, Rhône-Poulenc spun-off its entire chemical, fibres and polymers division to an existing fully-owned subsidiary named Rhône-Poulenc Fibres and Polymers, later renamed as Rhodia. The spin-off was carried out by way of the sale of the shares of the chemical division by Rhône-Poulenc to Rhodia, funded by a share capital increase in cash by Rhône Poulenc.
As a consequence, Rhodia acquired assets but also liabilities associated with the transferred division, including pension liabilities and environmental liabilities. In 1998, Rhodia’s shares were listed on the Paris and New York stock exchanges. A year later, Rhône Poulenc, after disposing of the majority of Rhodia’s shares, merged with the German group Hoechst to create Aventis, which was later acquired by Sanofi Synthelabo, renamed Sanofi in 2011.
In 2005, Rhodia informed Sanofi of its intention to claim compensation for damages that it claimed had resulted from the transfer by Rhône Poulenc of liabilities and obligations as part of the spin off.
In 2007, Rhodia pursued a claim in tort against Sanofi before the Paris Commercial Court, claiming that it could not discharge the pension and environmental liabilities and related expenses due to an undercapitalisation by Rhône-Poulenc during the stage of its creation. Rhodia also claimed that Sanofi should have financially supported its subsidiary, given the lack of resources resulting from the structuring of the spin-off.

b. Decision
The Paris Commercial Court dismissed Rhodia’s claim, holding that there was no proof of negligence or recklessness on the part of Rhône Poulenc during the creation of Rhodia. It was also confirmed that there was no duty owed by Rhône Poulenc to provide indefinite and unlimited support to a former subsidiary.